India needs a third generation of policy economists to provide the political leadership with a broad future agenda on the economy
In an interview he gave to The Indian Express in July 2016 to mark 25 years of economic reforms, Manmohan Singh spoke about the importance of the policy economists who had worked on the reforms agenda in the years preceding the actual event. His statement needs fresh attention at a time when Arvind Panagariya has resigned from NITI Aayog. Two other lateral entries into government in the past few years also moved on after short stints – Kaushik Basu and Raghuram Rajan.
Economic policy is a collaborative effort between political leaders, civil servants and policy economists. The 1991 reforms would definitely not have been possible without the political backing provided by P V Narasimha Rao.
The radical policy changes were pushed through an inertial bureaucracy by senior civil servants such as A N Verma and Naresh Chandra. And a stellar group of policy economists prepared the ground for the change of direction in the years preceding the actual event.
Most of them were lateral entries into government – Manmohan Singh, Montek Singh Ahluwalia, Bimal Jalan, Vijay Kelkar, C Rangarajan, Shankar Acharya, Rakesh Mohan and several others. These economists stayed on for many decades, though a few lateral entries such as Vijay Joshi and Ashok Desai had short stints.
Some of their contributions through the 1980s – and this is not a comprehensive list – are worth repeating here. Manmohan Singh wrote the landmark seventh Five-year Plan that shifted the focus of industrial policy from asset creation to productivity.
Ahluwalia was at the forefront of trade reforms. He also wrote the famous “M Document” in the summer of 1990, which anticipated many of the major policy reforms announced between 1991 and 1993.
Bimal Jalan was the main author of the long-term fiscal policy.
Vijay Kelkar was the driving force behind fiscal and tax reforms, including the goods and services tax.
C Rangarajan committed the Reserve Bank of India to monetary targeting, and also worked hard to end the automatic monetisation of fiscal deficits.
Shankar Acharya was arguably the most influential chief economic adviser ever.
Rakesh Mohan prepared the industrial policy reforms agenda.
Also, outside experts such as M Narasimham and Raja Chelliah provided road maps for financial and tax reforms.
The team that provided intellectual heft to the economic reforms was the second generation of economists in government. It replaced an earlier generation that had people such as C D Deshmukh, J J Anjaria, I G Patel, L K Jha, P N Dhar, Lovraj Kumar, Pitambar Pant – while the Planning Commission itself had used the talents of young economists such as Jagdish Bhagwati, Amartya Sen and T N Srinivasan.
At the same time, B R Shenoy, M Narasimham, Deena Khatkhate, Anand Chandavarkar and V V Bhat were in the economics department of the Reserve Bank of India.
India now needs a third generation of policy economists to provide the political leadership with a broad future agenda on the economy, as well as advice on how to manage it in the short term.
The cupboard looks a bit bare right now, despite the presence of talented economists such as Urjit Patel, Arvind Subramanian, Bibek Debroy, Viral Acharya and Sanjeev Sanyal. This is in sharp contrast to the manner in which China has upgraded the quality of its economic administrators over the past decade, though that reflects not just the political will to get experts into government but also the rapid advances in the quality of Chinese university education.
There are two intersecting routes to strengthen economic expertise in Indian policy. First, there is a crying need to bring a new generation of policy economists into government, similar to what happened in the 1950s and then in the 1980s.
Second, the task of policy research should be done in collaboration with a network of universities and research institutes across the country.
The path-breaking Economic Surveys helmed by Arvind Subramanian over the past three years are an excellent example of how young economists from within the finance ministry, as well as from outside, can be brought into the policy process. More of this needs to be done.
There is a growing chorus of voices arguing that governments do not need economists. All they need are good administrators. The reality is more complex. A motoring analogy could be useful. It is the political system alone that has the right to decide which direction a country should be moving in. Then there is the need for experts to design policy paths that will help the country get there. And the eventual journey is highly dependent on good administrators who keep the vehicle on the road.
India seems to be weak on one of the three components of good economic management right now.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.